This study models the behavior of a government that faces the problem of redistributing a common revenue pool efficiently and equitably. We specifically consider a redistributive rule that takes into account both local governments’ tax collection effort and the deviation of local incomes from their targets. Based on the comparative analysis of the alternative fiscal procedures led by central and local governments, the model suggest that, given the proposed redistributive mechanism, fiscal decentralization plays a disciplinary role if there is no strategic interaction among the local governments. In addition, privatization is positively associated with the fiscal disciplinary effects of FD.

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